NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects some high-yield US municipal closed-end funds (CEFs) to consider participating in the recently announced $750 million offering from the Puerto Rico Aqueduct and Sewer Authority (PRASA/Issuer Default Rating: CC/Rating Watch Negative). We believe that PRASA's recent price stability relative to other Puerto Rican issuers may lure some managers.
Puerto Rico bears very high speculative risks, and until a clear pathway for an orderly restructuring of debt occurs, purchasers today face the risk of being part of a future restructuring.
The PRASA offering will be the first test of the market's appetite for Puerto Rico-domiciled issues since Governor Alejandro Garcia Padilla's June statement that the commonwealth's debts were 'unpayable'. On Jan. 1 2016, the commonwealth faces $370 million due in debt service payments on its general obligations bonds.
If the PRASA offering is successful, a return of municipal CEF managers as investors in Puerto Rico would be a benefit to the commonwealth as they could be an important source of liquidity and signal that market participants are more willing to estimate recoveries post default of Puerto Rican issuers. However, even a successful offering does not mean there are not significant risks ahead.
Fitch notes that under proposed changes to Fitch's rating criteria for preferred stock of municipal CEFs, exposure to non-investment-grade state-level issuers would be capped at no more than 10% of the portfolio for calculating asset coverage. This lower exposure is proposed given the amount of volatility seen in the price of Puerto Rico bonds since 2013.
As we've recently noted in the Fitch Wire article, 'Fitch: Puerto Rico Holdings Small for Most Muni Closed-End Funds,' the majority of municipal CEFs long ago reduced their Puerto Rico exposure, protecting them from recent negative price performance of the bonds. At of the end of May 2015, 57 of the 192 Fitch-rated municipal CEFs still had some Puerto Rico holdings. The 57 funds held an average 1.1% of exposure, and funds holding higher allocations to Puerto Rico ranged between 2.5% to 6.0% of exposure to the commonwealth.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.